Construction Renovation Contracts 101: Six Key Considerations for Proactive Nonprofit Organizations and Associations
One of the challenges that nonprofit organizations and associations periodically must address is renovation contracts for either owner-occupied or leased space. It is a fact of life that any organization must periodically perform small and large construction renovations -- everything from building or office cosmetic work to garage resurfacing, from window and roof replacements to new HVAC system installations. Before signing a construction renovation contract, nonprofit managers and association executives should understand the potential risks and be prepared to minimize them. Here is a checklist that will help safeguard the organization’s funds:
1. Due Diligence in Selection of Architect and/or Engineer
An architect or engineer who is experienced in renovations plays a crucial role in the success of a renovation project. A competent design professional will assist in developing the design concepts, preparing a thorough set of project plans and specifications, selecting good contractors, and overseeing construction. A proactive organization should either have prior successful experience with the design professional or conduct due diligence on the design firm.
2. Experienced Construction Attorney
It is advisable to retain the services of a knowledgeable and experienced attorney to help guide the organization through the project, in particular reviewing and negotiating the contracts. This is particularly important for major renovation projects. Often attorneys representing nonprofit and tax exempt organizations know a lot about nonprofit governance, but perhaps little about the complexities of construction law. It is critical to retain counsel who is knowledgeable about both nonprofit legal considerations and construction law.
The most important reason to retain an attorney to assist the organization with a renovation project is for the attorney to write and negotiate the contracts. This includes the contracts with both the design professional and the contractor. For a $2,000 lobby touch-up, these may not be a need to consult an attorney. For large renovation contract, it makes good sense to consult an attorney
3. Crucial Bid Process
The bid process is an important step in a successful renovation project. A good design professional should assist the organization in preparing a list of contractors asked to bid on the project. The organization should ensure that the bid list only has experienced, competent, and professional bidders on the list. The organization should question the design professional closely about his experience working with each bidder and check references.
Organizations frequently ask when it is necessary to obtain three or more bids. Obtaining multiple bids is nearly always a good idea because they tend to drive the contract price down. Comparing bids is a good idea because, if a bid is much higher or lower than the others, that contractor may misunderstand the scope of work or has anticipated different problems on the project. Or the contractor may just be taking a lower margin.
It is a mistake to think that the lowest bid is always the best bargain for the organization. Sometimes contractors bid low in order to be awarded the contract and then they plan to "change-order" the contract to death to increase their margins. Such contractors usually have poor reputations, and due diligence will often uncover such undesirable entities.
4. Understand and Negotiate the Construction Contract Terms
It cannot be emphasized enough: the written contracts between the organization and its architect and engineer and between the organization and the contractor define the legal agreements and understandings between the parties. Contracts terms should be reviewed, understood, and negotiated so that the organization -- and its funds -- are appropriately protected. Each project is unique and requires unique contracts; one-size contract forms do not fit all projects.
Contractors often present owners with standard form contracts for major renovation contracts, which the organization might accept without even a minimal review. These form contracts are often drafted for general use in the construction industry and favor the architect or contractor, rather than the owner or lessee. Sometimes the forms presented do not apply properly to the specific project, and a contractor who tries to customize it for the particular project may inadvertently create inconsistencies with the fine print. The upshot for the organization is that it is not properly protected. Your contractor is not your lawyer; your own lawyer can draft the supplementary terms and conditions in order to protect the organization’s interests.
A contract between the organization and the contractor should address, among other things, the following issues: names of the parties to the contract; scope of work; start and completion dates, contract amount, and payment terms; retainage; handling of change orders; submission of payment documents; schedule; warranties; insurance and bonds; indemnification; dispute resolution; attorneys’ fees; and termination. These contract provisions, properly drafted, are critical for helping to protect the organization from improper and unanticipated risks.
The long and the short of renovation contracts is that a nonprofit organization or association must review, understand and negotiate the terms and conditions of such contracts to ensure that the organization is reasonably and properly protected.
5. Performance and Payment Bonds: What Are They?
The world of performance and payment bonds seems to the uninitiated to be shrouded in mystery. Both documents provide certain protections to the owner.
- A performance bond guarantees to an owner that the project will be completed, even if the contractor defaults. A contractor might, for instance, go bankrupt, walk away from the project for some reason, or perform so poorly that the organization terminates the contract.
- A payment bond guarantees that certain subcontractors and suppliers on a project will be paid. The general contractor receives payment from the owner and then pays its subcontractors and suppliers. But what if the general contractor fails to pay them? They will file liens against the owner. The payment bond guarantees that those subcontractors and suppliers will be paid for work performed or materials supplied on the project.
Your agreement with the contractor may call for these bonds. Typically, the contractor obtains the bonds from his surety company through his bonding agent and the owner pays the premium. The bonds are usually in the amount of 100% of the contract price. So, if the renovation contract is for $500,000, the bonds will be issued in the amount of $500,000. The cost of the bonds is between 1-3% of the contract price.
When should an organization require performance and payment bonds for a renovation contract? There are no hard-and-fast rules on this question. The answer depends largely on the cost and complexity of the renovation project; the higher the cost of and the more complex the project, the stronger the argument to require bonds from the contractor. The organization must weigh the benefits versus the costs of the bonds. For contracts under $100,000, an organization usually does not require bonds. For contracts over $500,000, the organization should seriously consider requiring bonds. For contracts between those amounts, the organization must make a judgment call.
6. NonProfit Organization’s Project Representative as Communicator
A clear line of communication between the owner, design professional, and contractor is essential to the smooth progress of a project. Because a nonprofit organization is managed under the authority of a board of directors, few of whom are experts in construction projects, it usual for the board to designate an “owner’s representative” on the project. The owner’s representative needs to (1) understand the project and the specifications; (2) have the authority to make project decisions on behalf of the organization; (3) document and organize a project file -- whether hard copies and/or electronic. In the event of a dispute between the organization and the contractor, a well-documented and -organized file can clarify many disputes, with little cost or time expended. Often, the project representative will be someone from the organization’s staff, if it has the on-staff expertise to do the job well. If not, the organization should consider hiring a professional to represent the organization’s interests throughout the construction process.
A major renovation project at a nonprofit organization doesn’t happen often. While it can be fun and exciting, it is also fraught with potential risks and ensuing legal disputes. Take the time to do it right so that the project goes more smoothly to completion, without major disappointments and exhausting construction disputes.